the dark knight rises - How did the police department survive, and why were they allowed to?

It might be an attempt to humiliate them: it seemed to me that Bane tried to reverse everything(the rich living on the streets, the righteous being judged).

So in this situation, having the police trapped in a hole(maybe analogy to the "hole"/isolation where prisoners are sent for very bad behavior) and fed by the prisoners, might make sense. This would also explain why they were shaven: they were offered the same treatment criminals in a prison would get.

Still, killing all the policemen at once(crushed like bugs) would have been, in my opinion more tragic and a lot safer for him.

But, as we have seen, Bane has a sense of drama, all his actions have to be somehow theatrical(he only blows up the stadium after the anthem is sung, keeps the bomb in a truck and has it driving through the whole city, in order to remind the people of his power and the examples could go on), so aspects like safety or big sudden tragedies are not very familiar to Bane. He said it himself that he finds it more enjoyable to let the people have a hope and then crush it, repeating the process until the citizens are truly broken(the same strategy is he trying to apply to Batman).